Making Sense of Intellectual Capital
Designing a Method for the Valuation of IntangiblesBy
- Daniel Andriessen, Professor of Intellectual Capital, Inholland University of Professional Education, The Netherlands
Peter Drucker has introduced us all to the knowledge era, where knowledge is the primary resource and intangibles (intellectual capital resources and assets) are now largely recognized as the most important sources of organizations' competitive advantage. With the recognition of the importance of Intangibles comes the problem of how to properly identify them and assign them a value within the corporation. This is an area of concern in 5 fields: 1) accounting and financial reporting, 2) performance measurement and management, 3) valuation in the finance field, 4) the Human Resources field in terms of management, strategy, and planning, and 5) Intellectual Capital. Over the past eight years, over 25 methods have been proposed for the valuation of intangibles coming out of these 5 fields. In this book, Andriessen evaluates 25 existing methods of intangible valuation according to highly developed criteria. In performing his evaluations, Andriessen synthesizes the state of the art research from these fields based on extensive research. He then presents his own method for valuing intangibles, which he began developing and testing as a Senior Manager at KPMG Knowledge Advisory Services in The Netherlands. He relates six case studies in which this method was tested in actual companies, carefully reviews the results of his tests, and then concludes by offering a new and improved method for valuing intangibles in his Weightless Wealth Toolkit, a complete step-by-step process for identifying, valuing, and managing Intangibles to help managers operate successfully in the Intangible Economy.
Academics, in the field of Intellectual Capital, such as the attendees at the McMaster World Congress on Intellectual Capital, professors and students in Knowledge Management MBA and PhD programs worldwide, Chief Knowledge Officers and other executives charged with valuing and managing Intellectual Capital and other intangibles. Secondary market: specialists in valuation of intangibles in finance, performance measurement and management in HR/Consulting.
Published: December 2003
Imprint: Butterworth Heinemann
"A most insightful knowledge navigation book on valuing intangibles. It is a very good state of the art overview 25 methods and also trying out its own refined model with illustrative cases. A recommended reading both for the practicioner as well as the researcher." - Leif Edvinsson, The world's first professor on Intellectual Capital and the worlds's first director of IC. Honorary Chairman Henley college KM Forum "Weaving a fascinating blend of sharp analysis and story telling Andriessen describes the journey of a passionate group of experts pursuing one of the most challenging and elusive riddles in modern business - how do intangible resources create value for the firm? This insightful and sweeping exploration of both the underlying questions and their numerous proposed solutions from other contributors in the field offers a wonderfully lucid overview of a complex subject. Andriessen's passion for methodologies that are coherent, rigorous and relevant is contagious. The Weightless Wealth Toolkit draws from the best available intangible valuation tools and methods but takes them to the next level, offering a powerful and original contribution. Whether you are new to the questions around intangibles or already well versed in the field, you will find this an indispensable reference and guide." --Verna Allee, author The Knowledge Evolution and The Future Of Knowledge: Increasing Prosperity through Value Networks. "In "Making Sense of Intellectual Capital", Dr Andriessen has produced one of the most synthesising books on this important but challenging topic. This book provides a very valuable overview and evaluation of the managerial tools available to managers when it comes to better managing their intangible assets. I highly recommend this book to any manger of a firm that is charged with extracting value from its intangibles." -- Goran Roos "I strongly believe, that Making sense of Intellectual Capital will be the compass for the intellectual academic community and the comprehensive guide for the practitioners that consider intangibles as the main resources to manage in the context of the knowledge economy. Andriessen is a perfect blend of an academic and a practitioner. As an academic he scientifically evaluates the 25 existing methods for managing and measuring intangibles. As a practitioner he also offers in his book his own method for valuing intangibles together with some useful practical applications. Excellent. The book really makes sense in the emerging field of intellectual capital, where converge many different contributions of innequal quality and relevance. Andriessen has done a great job that will please both academics and practitioners. This is an inspiring book, mainly of academic nature but with very practical and powerful messages to improve the value of businesses. Andriessen really challenges the Intellectual Capital conventional wisdom with new approaches and contributions." -- José Maria Viedma "In theory, practice and theory are the same; but in practice, they ain't". Daniel Andriessen deftly walks that fine line between theory and practice. His book is academic enough to provide a fundamental contribution to the science and understanding of the valuation of intangibles. Yet it remains practical enough, with its candor and honesty, to allow for effective implementation of his methods and ideas, manifested in his Weightless Wealth Tool kit. It demonstrates that measurement is not enough, that valuation is paramount in leveraging intangibles for strategic benefit. MAKING SENSE OF INTELLECTUAL CAPITAL is important reading for anyone who considers their intellectual capital to be strategic to their business." -- Howard Deane, Chief Knowledge Officer, KMPG LLP, Canada
- Table of contentsPreface and Acknowledgements xix1. Objective: Valuation and Measurement in the Intangible Economy 1.1 Introduction The Intangible perspective The transformation of the economy Seven characteristics of the Intangible Economy Drivers of the Intangible Economy The Intellectual Capital community Valuation and measurement of intangibles Value Valuation Four ways to determine value Objective and problem My objectives Problem to tackle Methodology Practicing management research as a design science Using the developing multiple case study Structure of the book 2. Methodology: The Science of Designing Practical Methods Introduction Making sense of the social world Distinctions make sense The world doesn't speak We know according to the way we are and the way we feel The social world does not sit still Social science Anything goes? How to test an empirical proposition How to test a practical proposition Bringing the two together Science follows its own rules Management research The subject of management research The scientific nature of management research My study The reflective cycle used in this study Difficulties in applying the reflective cycle The use of reconstructed logic 3. Legacy: Methods for the Valuation and Measurement of Intangibles Introduction What: Distinctions & definitions Intellectual Capital Intangible Assets Human Resources and Human Assets Reflection Why: Problems & consequences Improving internal management Improving external reporting Statutory and transactional issues Reflection How: Solutions & results Financial valuation methods Value measurement methods Value assessment methods Measurement methods Reflection Implications for the requirements of a new method 4. Design: Draft of a New Method Introduction Request for proposals Request Evaluation Iteration 1 Design Evaluation Iteration 2 Design Evaluation Iteration 3 Design Evaluation Iteration 4 Problem definition Requirements Design 5. Test: Trying Out the New Method Introduction Bank Ltd Context & problem definition Specific requirements & design Implementation & results Additions to the design Reporting to the client Evaluation & modifications Electro Ltd. Context & problem definition Specific requirements & design Implementation & results Reporting to the client Evaluation & modifications Automotive Ltd. Context and problem definition Specific requirements & design Implementation & results Evaluation & modifications Logistic Services BU Context & problem definition Specific requirements & design Implementation & results Reporting to the client Evaluation & modifications Professional Services LLP Context & problem definition Specific requirements & design Implementation & results Reporting to the client Evaluation & modifications Consulting Dept. Context & problem definition Special requirements & design Implementation & results Reporting to the client Evaluation & modifications Result of the tests The method and its requirements The success of the method 6. Lessons Learned: Contributions to Intellectual Capital Research Introduction Lessons about the method The application domain of the method The strengths and mechanisms of the method The weaknesses of the method Final modifications to the method Lessons about valuing intangible resources Valuing intangibles requires values Valuing intangibles requires a beholder Valuing intangible resources does not require money Valuing intangibles requires identification and demarcation Valuing intangibles requires diagnosis Valuing intangibles requires methods Lessons about practicing IC research as a design science Reconciling the rigor-relevance dilemma in IC research Determining the effect of the implementation Determining the contribution of the method The analyst versus the researcher Implications for future IC research Valuing and improving problem definitions Explaining and improving success-rate Explaining and improving the impact of numbers Epilogue Appendix A. Overview of 25 Valuation and Measurement Methods A.1 Balanced Scorecard (Kaplan & Norton) A.2 Calculated Intangible Value A.3 Citation-Weighted Patents A.4 Economic Value Added (Stewart) A.5 Holistic Value Approach HVA (Roos) A.6 Human Resource Accounting A.7 IC Audit (Brooking) A.8 IC-Index (Roos) A.9 Inclusive Value Methodology (M'Pherson) A.10 Intangible Asset Monitor (Sveiby) A.11 Intangibles Scoreboard (Lev) A.12 Intellectual Capital Benchmarking System (Viedma) A.13 Intellectual Capital dynamic Value (Bounfour) A.14 Intellectual Capital Statement (Mouritsen et al.) A.15 iValuing factor (Standfield) A.16 Konrad Group A.17 Market-to-book ratio A.18 Options Approach A.19 Skandia Navigator (Edvinsson) A.20 Sullivan's Work A.21 Technology Factor (Khoury) A.22 Tobin's q (Tobin) A.23 Valuation approaches A.24 Value Added Intellectual Coefficient VAIC(Pulic) A.25 Value Chain Scoreboard (Lev) Appendix B. Weightless Wealth Toolkit B.1 How to Use the Toolkit B.2 Phase One: Do Intake B.3 Phase Two: Identify Intangible Resources B.4 Phase Three: Carry out Value Assessment B.5 Phase Four: Perform Financial Valuation B.6 Phase Five: Develop Management Agenda B.7 Phase Six: Report Value Dashboard Glossary of Terms Bibliography About the Author Index